Shaw Wallace, company chairman charged with investing abroad without approval of RBI

It is a classic case of the biter bit. A company chairman battling furiously to prevent a takeover by charging the usurper(s) with violations of the Foreign Exchange Regulations Act (FERA), has himself been charged with violating FERA, and worse, found guilty. The company is Shaw Wallace, its chairman is S.P. Acharya, and the men who may have something, if not a great deal, to say about the rather unexpected turn of events, are the very same persons who have been accused by Acharya of violating FERA: the Dubai-based M.R. Chhabria and the Bangalore-based Vijay Mallya.

Shaw Wallace has been asked to pay a fine of Rs 1.10 lakh while Acharya has been asked to personally pay Rs 12,000 as penalty for two FERA violations. Interestingly enough, although the order was delivered to the company two months ago, the officials of the Enforcement Directorate (and more understandably Shaw Wallace executives themselves) have kept the event a closely guarded secret, with not a word being leaked out. This is in contrast to the instant publicity given to the actions taken against Mallya and Chhabria.

In a 12-page order passed in February, the Additional-Director of Enforcement, R. Swaminathan, who is also looking into the accusations against Chhabria and Mallya, has charged both Shaw Wallace and Acharya with investing abroad without the approval of the Reserve Bank of India (RBI) and deliberately not remitting the substantial profits raked in by Shaw Wallace Overseas Limited, (SWOL), London, its fully owned subsidiary abroad. SWOL was floated in 1934 and came under the FERA purview from 1973.

The RBI, when granting permission to Shaw Wallace to run SWOL, had made it clear that all the dividends would be remitted back to India and that the company would not make any investments abroad without its prior approval. But in 1979, SWOL acquired a 3 per cent stake in British Gas stock by investing 89,554 Pound Sterling without the RBI's permission.

In addition, Swaminathan held that the company misinformed the RBI that SWOL was not making any profit and that the question of remitting dividend did not arise. Swaminathan in his order proved that the company had in fact made a net profit between 1979 and 1982, and more damningly, that the company in question had not remitted the dividend at all.

Both Acharya and Shaw Wallace maintained that their dealings did not violate any FERA provisions. They also maintained that the procurement of British Gas stock was not an investment for which the RBI's permission was required. Acharya also argued that he did not attend any of SWOL's board meetings although he was one of its members.

Swaminathan, while dismissing Acharya's plea, ruled that "I am satisfied that purchase of 3 per cent British Gas stock was an investment" and that Acharya couldn't escape penalty by saying that he was not attending the board's meetings. He concluded: "As managing director of the company, he was responsible for all the matters of the company. I therefore find him guilty."

Swaminathan chose to treat the investment in British Gas and non-remittance of dividends as two separate violations and imposed two penalties. While Shaw Wallace was fined Rs 1 lakh for unauthorised investment and Rs 10,000 for not remitting dividends, Acharya was asked to pay Rs 10,000 and Rs 2,000 for the same offences.

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